ICI Tells Congress 401(k) Model is Still Strong
Investment Company Institute President Paul Schott Stevens testified before the U.S. House of Representatives Education and Labor Committee on Tuesday to avow that the 401(k) model is working, in spite of the market's downturn.
Americans have continued to contribute to their 401(k) as a responsible measure to prepare themselves for retirement, Stevens said. Half of the $16 trillion that Americans have saved for retirement is held in 401(k)s, and that $8 billion would probably have not been set aside for retirement were it not for these instruments, Stevens said.
And despite the market's steep declines, Americans are "not panicking," he noted. "As of October, only 3% had stopped contributing to their accounts, and [only] 3.7% had taken withdrawals. Clearly, 401(k) savers are staying the course."
That said, Stevens spelled out a number of ways 401(k) plans can be improved, beginning with better education about saving at all stages of Americans' lives, starting in the first grades of school all the way through the workplace. Stevens also said that the current state of the market has made it abundantly clear that required minimum distributions at age 70-1/2 are penalizing those retirees who must withdraw their money now, when the market is so weak.
Further, fees, risks, holdings and performance must be much more clearly spelled out, Stevens said. In addition, 401(k) plan sponsors should be required to make automatic enrollment and automatic savings escalation mandatory. That said, Stevens Congress should not determine what the default investment choice should be. Rather, that should be left up to plan fiduciaries, Stevens said.
Decumulation options for those workers about to retire should also be left up to the discretion of the plan fiduciary, he added. "The optimal distribution choice for a participant could be a single product or combination of products," Stevens said. But that "will depend on individual circumstances, including health status, other income sources, such as Social Security and defined benefit plans, and whether a retiree hopes to leave an inheritance to children. That there is no solution that is right for all retirees means that education and advice are of great importance in the distribution phase."
It should also be easier for employers to diversify participants out of heavy concentrations of company stock as they near retirement, and easier for employers to offer savings plans. For those workers whose employer does not offer a 401(k), they should be able to invest in an "R" series of Treasury savings bonds.
Connecticut Proposing Tough Hedge Fund Rules
Connecticut lawmakers have proposed hedge fund regulations, including obtaining a license, annual audit, disclosure of fees and significant changes in management or investment strategy, as well as a higher minimum investment threshold of $2.5 million for individuals and $5 million for institutions.
Ten percent of the world's hedge fund assets are concentrated in Connecticut, and the proposed regulations would reverse a tradition of a hands-off approach to the industry.
U.K. Hedge Fund Group Pushing for Reforms
The Alternative Investment Management Association, a hedge fund group headquartered in the U.K., is pushing for more transparency, in an effort to stave off regulation.
The self-regulations the association is proposing include registering with authorities, documenting executives' qualifications and disclosing their short positions.
The hedge fund industry is bracing for tighter regulations in light of the financial crisis and recent revelations of fraud, including the $50 billion scheme by Bernard Madoff.
European Central Bank President Jean-Clade Trichet said the financial crisis is a "loud and clear call" that additional regulation is "systemically important" to the health of every nation's economy.
Fidelity Investment's Assets Fell 22% in 2008
Fidelity reported Tuesday that assets under management fell 22% in 2008 to $1.25 trillion. Revenue fell only 3.8% to $12.9 billion, but operating income tumbled 18% to $2.36 billion.
"Although we ended 2008 better than a number of financial firms," Fidelity Chairman and CEO Edward C. Johnson III told shareholders in a letter, "it was a year of painful experience for the financial services industry, a period laced with toxic investment waste and the casual use of other people's month by a number of institutions."
As a fund family, Fidelity's offerings beat 56% of competitors, down from 73% in 2007. Among Fidelity's money market funds, those funds beat 87% of their peers funds last year, steady with the 84% that beat peer funds in 2007. Investment-grade bond funds also did well in 2008, with 62% beating their peers, up from 46% the year before.Only 36% of Fidelity equity funds beat their rivals in 2008, down from 72% in 2007. Fidelity's portfolio managers had exposure to financial services companies that failed in 2008, explained Asset Management Chief Michael Wilens.
Mutual Fund Sales Expected to Dip in 2009
Mutual funds' 2009 sales outlook is modest, according to Keefe, Bruyette & Woods.
Forty-four percent of respondents to the KBW semiannual survey on retail investment product distribution trends said they expect mutual fund sales to decline this year. The firm surveyed 36 gatekeepers at a variety of distribution channels in December and January.
The distributors said they still expect moderately healthy growth in mutual fund and managed account sales over the next five years but that they expect exchange-traded funds to grow faster than traditional mutual fund products; 62% said they expect to increase their use of ETFs to some degree. Thirty-six percent of distributors expect investors to remain more conservative in their asset allocation. Sixty-five percent expect increased demand for products that can generate income growth. KBW said the survey indicates that demand will remain comparatively better for fixed-income and more conservative equity strategies.
Morningstar's 3Q Earnings Down 3.7% to $19.3M
Morningstar reported third-quarter earnings of $19.3 million, or 39 cents a share, down 3.7% from $20 million, or 41 cents a share, in the third quarter of 2007.
Revenue held steady at $119.3 million, up from $118.1 million. "We grew in the quarter but just barely," CEO Joe Mansueto told Reuters. He blamed the economy and financial markets for the lackluster performance. About 13% of Morningstar's revenue is tied to asset-based fees, which declined 32% to $66 billion of assets under advisement, Mansueto said.
In addition, he said, "Our key customers were hit hard, and as budgets are reined in, that affects us, too."
So far, Morningstar has not laid off any employees. The company's balance sheet is also strong and includes no bank debt, Mansueto said.
Hedge Funds Permitting Sales on Secondary Market
Some hedge fund customers are getting their money back by selling their shares on the secondary market, Dow Jones reports. Hedge funds see this as an alternative to locking up customers' money through so-called "gates."
With lock-up periods lasting several years in some cases, the secondary market for trading hedge fund shares developed a number of years ago. But those trades were few and far between, until recently. And with the markets so poor, some purchasers are getting hedge funds to waive their fees until their numbers are back in the black.
"Managers are getting more acclimated to allowing [secondary market trading] to happen because there really isn't any downside risk unless the money is flowing from strong, stable hands to weak hands," said Charles Gradante, co-founder of hedge fund advisor Hennessee Group.
Many of the purchasers on the secondary market are hedge funds-of-funds, but in recent years, pensions and wealthy individuals have also come into play.
Financial Services Has Shed 325,000 Jobs Globally
Since the onset of the credit crisis in August 2007, the financial services industry has lost 325,000 jobs around the world, according to the International Labor Organization. With 40% of those jobs lost since this past October, the acceleration of job cuts is troubling, the group said.
"These figures almost certainly understate the real situation in a sector which has been at the epicenter of the financial and economic crisis," said Elizabeth Tinoco, chief of the International Labor Organization's sectoral activities branch. "As the global economy sinks further into recession, and financial institutions' assets experience even greater impairment, the industry's job losses can be expected to rise even faster." The worst hit has been the banking industry, following by insurance and asset management.
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